Signalling and Renegotiation in Contractual Relationships

Paul Beaudry and Michel Poitevin

Econometrica, 1993, vol. 61, issue 4, 745-82

Abstract: This paper examines how the possibility of renegotiation affects contractual outcomes in signaling games when an infinite number of rounds of renegotiations are allowed before contracts are executed. The main results of the paper are (1) contracts may still contain distortions, (2) the popular 'efficient' separating-equilibrium outcome is never an equilibrium outcome with renegotiation, (3) incentive-compatibility constraints can be generalized to incorporate renegotiation, (4) equilibrium outcomes can be separating and nevertheless depend on the uninformed player's prior, and (5) renegotiation in signaling games may lead to outcomes similar to equilibrium outcomes of screening games in which multiple contract purchases are allowed. Copyright 1993 by The Econometric Society.

Date: 1993
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